Which of the Following Is True If One Year Forward

question 4

Multiple Choice

Which of the following is true if one year forward rate is F = 1.83$/£; current spot rate is S = 1.81$/£; and interest rates are i = 3.5%,and i* = 3% (where exchange rates are quoted in $/£,i is the interest rate in the U.S.and i* is the interest rate in the U.K.) ?

• A) Arbitrage is not possible
• B) Arbitrage is possible and arbitrage strategy involves buying £ forwards
• C) Arbitrage is possible and arbitrage strategy involves selling £ forwards
• D) Arbitrage is possible; however, there is not enough information to pick one of the answers above.

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Definitions:

Operant Conditioning

A learning process through which the strength of a behavior is modified by reinforcement or punishment.

Classical Conditioning

A simple form of learning in which one stimulus comes to bring forth the response usually brought forth by a second stimulus by being paired repeatedly with the second stimulus.

Active Learning

An educational approach emphasizing engagement with the material through problem-solving, discussion, or applying concepts to real-world scenarios.

Passive Learning

A learning style where the learner receives information without actively engaging or interacting with the material.